In pursuit of diversification, the country has instigated initiatives to encourage the growth of non-resource sectors. By Ben Aris Oil is essential to the Kazakh economy, but to ensure long-term prosperity, the country must diversify away from raw material extraction.

The Kazakh government is well aware of the problem and had already launched an extensive modernization program, even before the 2008 global economic crisis made diversification imperative.

President Nursultan Nazarbayev laid out the main goals of Kazakhstan’s modernization program in his 2010 State of the Nation speech. The president said that a large part of the $8-billion-a-year transfers from the National Fund – a reserve fund created from oil revenues to the state – would be directed to industrialization programs. Kazakhstan will invest up to $20 billion in the non-resource sectors of the country over the next five years, but the goal is to use this investment to prepare the ground for bringing in more foreign direct investment, which, it is hoped, will then take the lead in diversifying the republic’s economy.

Projects identified

A list of priority projects has been drawn up by the state agency Samruk-Kazyna, which holds much of the state’s assets and has been consulted for much of the industrial reform policy. All in all, the industrialization program will include 162 projects, with a total budget of KZT6.5 trillion ($43 billion), and the state expects that more than 200,000 jobs will be created.

Samruk-Kazyna has adopted a two-pronged approach. First, the state agency will help existing companies to increase the value-added component of their production, and so drive the processing and associated manufacturing industries. The second line of attack is to build the infrastructure to support the creation of new businesses and technologies. For example, among the larger investments are: upgrading all three petrochemical plants in Kazakhstan by 2014; building a new gas-processing plant; finishing the Balkhash, Mainak and Ekibastus GRES-2 power stations; and building a string of locomotive plants that can supply the republic and its neighbors with new trains.

To assist with the sector-specific reforms, the president called for the simplification of the bureaucracy that surrounds setting up a business. Among other measures, the president said the costs of starting businesses in Kazakhstan should be cut by 30 percent in 2010, and another 30 percent in 2011.

A large part of this goal has already been achieved, and the World Bank says in its Doing Business 2011 report that Kazakhstan has made more progress than any other country in the world.

Other initiatives to extend this progress include: accession to the World Trade Organization; ongoing integration with other Commonwealth of Independent States (CIS) countries, in particular via the new Customs Union with Belarus and Russia; developing a law for the country’s Special Economic Zones; and creating a roadmap for entrepreneurship development up to 2020.

Michael Weinstein, director of the European Bank for Reconstruction and Development (EBRD) in Kazakhstan, which has joined the diversification effort and committed $1 billion in capital to support the

drive, praises the government’s more pragmatic approach to carrying out reforms.

“In the past, there have been various diversification programs that for one reason or another did not succeed,” he says. “ The new program is more promising. Momentum is building. There is a window of opportunity to diversify – post-crisis, but before oil prices go through the roof again.”

This is not the state’s first attempt to remake the shape of the economy, but experts believe that the new program is a lot more likely to succeed. “The government has set its sights a bit lower this time – the priority sectors that President Nazarbayev has selected are the right ones,” says Weinstein. “Rather than looking at high-tech, the government is targeting sectors such as pharmaceuticals, chemicals, petrochemicals, metals, construction materials and fertilizers – the things that the country needs.”

Key sectors that the government hopes to develop:

Agriculture. The territory of Kazakhstan is the size of Western Europe and agriculture has huge potential. The basics are already there, but most of the supporting infrastructure is not. The state plans to increase productivity in agriculture and processing of agricultural products by a factor of two by 2014, through the application of new equipment and new technologies. At the same time, the state would like to increase exports of agricultural products to Russia, Belarus, Central Asia and Middle Eastern countries. “ Building the value chain in agriculture is important. The agriculture sector is difficult to invest in, but we hope [the EBRD’s participation with] investment will encourage other companies to become more transparent,” says Weinstein.

Infrastructure. Support for infrastructure of all types is crucial. In the energy sector, the EBRD and other international organizations helped to finance the construction of a new north-south power line to address the imbalance between the ends of the country, while the state is also investing in additional power-generating capacity.

Industry. The state will use various means to boost non-oil production and hopes to increase the share of non-oil exports to 45 percent from 27 percent in 2010. Three new locomotive plants are in operation, or close to it, and more engineering projects are in the pipeline. At the same time, the state will encourage investment to decrease energy consumption per GDP unit by 25 percent, while increasing productivity in processing industries by a factor of two. The main focus will be on boosting the share of processing industries in GDP to at least 13 percent – from 11 percent in 2009 – and increasing the share of innovation-driven enterprises to 20 percent from four percent.

Construction materials. Construction and real estate were major economic drivers before the crisis, but development still relies heavily on imports. Another plank of the diversification program is to develop the domestic construction materials sector. The president called for raising the share of domestically produced construction materials to 80 percent by 2014.

Pharmaceuticals. President Nazarbayev is keen to develop a domestic pharmaceutical industry and in early 2009, launched an ambitious program aimed at raising the volume of domestically produced medicines consumed to half of the total by 2014. This means building many new plants in a relatively short time, and the government is actively looking for foreign investment to facilitate the program. The furthest advanced project is that of Chimpharm – by far the biggest domestic player – to build a new tablet factory in Astana. This will be the first plant of any kind to be located in the new capital. The Kazakhstan Development Bank has already provided the funding and is also backing a second project to expand production facilities in Shymkent. Other players – including GlobalPharm, Nobel AFF and Romat – are reportedly planning new lines or new plants.

“Industrial development is our chance in the new decade for new opportunities for our country,” said President Nazarbayev, in his State of the Nation speech.

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